Imagine instead of the pegs of prepaid gift cards for Applebee’s, Best Buy and Home Depot, you see a general menu much like one at a restaurant. And instead of appetizer, entrée and dessert, you have restaurants, electronics and hardware.
The world of prepaid and gift cards is about to undergo a sweeping transformation, and smartphones and digital habits are the catalysts.
The foundational shift comes from the growing use of mobile phones as transactional devices. Be it to redeem rewards points, pay for gas or board a plane, the digital retrieval of “currency” from a phone, tablet or even a smart watch is forcing changes in prepaid phone top-ups, gift cards, general-purpose reloadable (GPR) cards and even paying bills.
This transformation won’t come easily, however. New products such as toll cards and capabilities such as selling an infinite number of retailer gift cards from a single store come with a list of new obstacles, including disparate transaction processes, the need for consumer and employee education and lack of significant return.
Take transactions, a definite thorn in the side of many retailers. “If all cards could be activated the same way, it would reduce complexity and … the learning curve for new associates,” says David Hallman, a category manager for West Des Moines, Iowa-based Kum & Go.
Another Midwest retailer, speaking on condition of anonymity, raises another concern: justifying the time and effort behind any new product. But what helps, she says, is the ability to track how such products affect a store’s market basket.
Despite the speed bumps, numerous trends are converging to transform this high-margin impulse category:
▶ A higher-income demographic is now tapping prepaid cards because they’re disenchanted with rising bank fees or looking for ways to better manage their money.
▶ Gift cards have emerged as a processing and transaction base for loyalty, with Starbucks having created a proven model.
▶ Digital and mobile devices are slowly becoming favored ways to buy goods and services.
The concept grounding many of these trends seems to be the growth and consumer adoption of the digital gift card, according to Mike Fletcher, general manager of digital solutions for Atlanta-based InComm. The gift card has evolved from plastic, originally the only option, to now include email printout and digital.
As more consumers migrate to digital giving and redemption, the electronic infrastructure of gift cards is solidly in place and ready to handle the traffic. If a customer comes in with a gift-card bar code on the screen of their mobile device, “for the processor, it’s a physical card,” Fletcher says.
CONTINUED: The Importance of Digital
The Importance of Digital
Let’s take a step back for a second. Digital gift cards for retail chains are certainly part of a larger category, one with a wide and often unrelated array of products, purposes and paradigms. So in no way would focusing on these cards cover off on wireless top-ups, gaming or the sale of SIM (subscriber identification module) cards, which basically allow anyone with a smartphone to switch carriers on their own.
But digital gift cards speak to the hot topic of the day: mobile.
Of course, customers can always buy and send gift cards online, with no c-store needed. But c-stores play a role in a few ways. Like all brick-and-mortar retailers, they offer a natural outlet for cash-paying customers, and they also can offer their own branded gift cards.
What is unique about this situation for c-stores is the creation of a store’s digital card. That means creating a digital presence, from which customers can initiate the gifting process from home, work or even the store, and know the gift’s recipient can immediately go to that store or chain and use the gift.
For retailers, this means developing a digital strategy, from what the offer looks like on a computer screen to the digital image on a phone, all the way through to how a customer and cashier interact. “We focus on brand experience,” Fletcher says. “We want content, user instructions, all to be seamless.”
Business can handle the process in many ways. One Fletcher describes is sending recipients an email with a secure link. Using gift-card processes, they can then go to the store to shop, pay and check leftover value.
Though c-stores and grocery chains are generally behind in their own development in this area, Fletcher says, e-commerce giants such as Seattle-based Amazon and Salt Lake City-based Overstock.com are leaders.
That’s not to say consumers are flocking to e-commerce today. But interest exists. In a 2013 InComm study, 70% of respondents said they were more interested in digital gift cards than they were two or three years ago, while 74% said they would purchase a digital gift card in 2014. (InComm did not give the parameters of the study, such as how many people were surveyed.)
People’s comfort levels with using phones to redeem the gifted amounts are not as high. Only 40% of those in the same study said they’d be interested in redeeming the card via a scanning of the phone vs. a printout. Still, it’s a “rapidly growing” segment of the population, Fletcher says.
But once a consumer is in the mindset of using the phone to pay for goods and services, the next step is a gift-card-driven rewards system, Fletcher says. He spoke of a flower company that would give customers a $10 digital gift card if they spent $50 or more with the company, but the promotion carried an automated expiration date.
“You do this to drive behavior,” he says. “It’s about loyalty, promotions and engagement.”
CONTINUED: Move to Prepaid
Move to Prepaid
Running parallel to the growth of digital gift cards is the mounting strength of a core category item, the prepaid GPR card. By all indications, these products are on the rise, with many people using them as alternatives to fee-laden checking accounts or as money management tools for themselves or their children.
According to a report by Maynard, Mass.-based Mercator Advisory Group, the amount of spending on GPR cards tripled from 2008 to 2012, to $76.7 billion. Mercator researchers say that number will more than double to $168.4 billion by 2015.
Citing a Federal Reserve 2013 payment study, Tim Richardson, vice president of business development, financial services, for InComm, says prepaid-card transactions are rising at a 36.1% compound annual growth rate vs. 9.3% and 9.0% for credit and debit cards, respectively.
Relatively new services such as direct-deposit and mobile-deposit card loading will further accelerate prepaid card use, he says.
But this burgeoning category is under some attack. News of “victim-assisted” fraud emerged in the past year, and this summer, financial-services company Green Dot opted to discontinue its MoneyPak loadable debit-card product.
Citing the decision in a statement to a U.S. Senate hearing on fraud committed against the elderly this year, the Pasadena, Calif.-based Green Dot said it would “sunset” the product as of first-quarter 2015.
InComm has a similar product called Vanilla Reloadable. While it has yet to announce a termination date for the product, it is a strong likelihood, although the timetable has yet to be determined, according to InComm.
On Green Dot’s quarterly investors call last summer, founder, CEO and president Steven Streit said that the “benefit” of getting rid of MoneyPak is twofold.
First, moving to reloading debit-card products at the register via card swipe (Green Dot’s newest option) is a “more intuitive customer behavior, easier to teach for the new customer, easier to train for the cashier.”
Second, “it really completely eliminates the opportunity for this third-party victim-assisted fraud, which I’m sure you’ve read about in the news quite a bit [and] has been a real challenge for us with that MoneyPak product,” Streit said.
Originally, when customers bought a MoneyPak product, it came with a personal identification number (PIN). They would use that number to go online and load money onto a prepaid card. In the fraud, scammers would call unsuspecting targets, convince them they were officials with the Internal Revenue Service (IRS) or some other organization and get them to buy a MoneyPak product for a set dollar amount. Then the criminal would ask the victim for the PIN and drain the account.
Streit called the entire fraud issue,“a shame because it’s teeny-tiny. If you look at the nefarious … use of the MoneyPak product, it’s a tiny piece of that product, maybe less than 1% or 0.5% of all transactions.”
CONTINUED: Wireless Trends
Wireless Trends
In terms of wireless phones—another strong subset of the prepaid category—the biggest trends include a migration from “post-pay” phone plans to less expensive no-contract or prepaid plans; the emergence of the SIM card or bring-your-own-device (BYOD) phenomenon; and the rise of both smartphones and their accompanying data usage.
As a service provider, Jim Coffey, director for TracFone Wireless, Miami, says one of its newer opportunities will be in the BYOD space. While a significant block of people in the market for a new phone will want a high-tech, newly released model, the bigger market for his company lies in what he called “family” plans, in which the old phone will be passed from husband to wife, parent to child or from an older sibling to younger.
“We’re constantly trying to grab that customer,” Coffey says. “They’re saying, ‘I’d like to switch but I need that family plan.’ ”
Along those lines, Coffey says a big target demographic for carriers in the latter part of this year will be 7- to 12-year-olds. In terms of new subscribers, “That’s where the growth is right now.”
To back up his points, Coffey shared:
▶ TracFone data shows its largest growth in subscribers comes from people switching from a post-pay contract, going from 39% of subscribers in 2011 to 44% in 2013.
▶ Advanced data users are increasing, going from 57% of users in the third quarter of 2011 to 70% of users in the same time period in 2013, according to Nielsen data.
▶ For the last quarter of 2013, 88% of handsets sold were either iPhones or smartphones, a trend consistent in all four quarters of that year, according to Port Washington, N.Y.-based The NPD Group.
CONTINUED: Future Connections & Statistics
Future Connections
Jason Marshall, vice president of business development for InComm, says an opportunity exists to take the prepaid category beyond a store’s four walls. In addition to allowing more branded gift cards to make their way into the store via a digital presence, he says the same platform can allow any number of businesses to connect with cash-paying customers walking into convenience stores.
In working with a number of Silicon Valley startups, he says a common problem exists: “People have great stuff to sell, but they need a place for the consumer to make a payment in cash.”
Similar to bringing in more branded gift cards than there is peg space, InComm can facilitate a connection to outside entrepreneurs with new products and services. The reasoning is that the transaction infrastructure already exists.
With InComm connected to retailers’ POS devices and having the card swipe or bar-code scanning capability, Marshall says an “account loading network” exists, and whether the trading partner is iTunes, Applebee’s, Verizon, a tollway agency or the Nevada lottery commission, the transaction is the same.
Acknowledging that some retailers may have to invest in new equipment to take advantage of unfolding opportunities, Marshall compares the situation to planning a fruit tree. “People ask, ‘When’s the best time to plant that fruit tree?’ And the best answer is, ‘Twenty years ago,’ ” Marshall says. “The second-best answer is now.”
Don’t Overlook the B2B Market
The prepaid market for business-to-business activity can be an opportunity for c-store retailers.
Here are a few statistics:
$12.3 billion:
The amount loaded onto prepaid cards for corporate rewards in 2013.
$9 billion:
The amount loaded onto prepaid cards for consumer promotions in 2013.
Source: Mercator Advisory Group
Mobile Influences Prepaid Category
The use of mobile devices to send gifts, pay for goods and services or surf the Web are all reshaping the prepaid category. Here are a few numbers that may affect the category.
46%
Percent of survey respondents interested in storing digital gift cards on their phones.
40%
Percent of survey respondents who prefer to have a digital gift card scanned on their phone rather than carrying a printout.
Source: InComm, November 2013
$50 billion vs. $22 billion
The difference in mobile commerce in 2013 vs. 2012.
Source: Mercator Advisory Group
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